Most of the businesses have suffered great losses since the beginning of the recent COVID-19 pandemic. However, small and medium businesses have had the toughest time.

Many were able to adapt. Restaurants started delivering food to your doorstep, some brick and mortar stores also used the opportunity to enter the eCommerce sector. However, whether the business has just entered online retail or has been doing it for a long time, it has likely experienced an increase in friendly fraud.


What is friendly fraud?

The friendly fraud is a situation when a cardholder, who has bought some items from a merchant, files a dispute to their bank requesting a refund. The bank then returns the money to the buyer. This occurs when, for example, a person buys a product online, pays for it, receives it, and then regrets the purchase. Then the buyer requests a chargeback and returns his or her money while keeping the product.

The buyer can state any reason for the chargeback and get away with it in most of the cases. Some of them are:

  • The item wasn’t delivered.
  • The item doesn’t match the description.
  • The transaction wasn’t authorized by the cardholder.

If the first 2 cases are self-explanatory, in the third case the buyer can state that his or her kids bought something without permission.


An increase in friendly fraud

According to a recent research, 60% to 80% of chargebacks are linked to friendly fraud. Some of the chargebacks are made because of a buyer’s misunderstanding. They may not know the difference between a return and a chargeback.

However, a good portion of the chargebacks is intentional. People purposefully utilize the loopholes to save money.  We are observing a significant increase in fraudulent chargebacks during the economic downturn. When financial resources are scarce, people turn to extreme measures.

A chargeback is a return of money to a payer, which is initiated by the buyer, processed by a bank but ordered by a card issuing company.

A return is usually performed by contacting the merchant and resolving the issue directly. The merchant might accept the return, get the item back, and issue a refund.

As you can see the process of a chargeback is quite complicated, and unlike a traditional return, it involves many parties.

Usually, it follows these steps:

  1. A cardholder challenges the transaction.
  2. The bank reviews the dispute and either declines it or issues a refund.
  3. The merchant gets notified about a refund and can dispute it.

This is a very simplified view. This article describes the process in detail.


The issue of chargebacks

The problem is that banks do not spend enough time to understand the case. They usually follow the policy that the customer is always right and believe the buyer’s claims by the default.

In order for a merchant to dispute the chargeback, it needs to provide a piece of solid evidence that would disprove the buyer’s claim.

On top of the overly complicated dispute submission process that the merchant has to go through, the evidence is very difficult to obtain.

For the claims such as “doesn’t match the description” or “my kids bought it from my card”, the seller cannot really find any evidence to disprove that. Especially if the merchant is selling used goods, crafts, or food. There’s just no way to prove that the food was warm, not cold during the delivery, or that the small scratch on the used laptop was actually seen on a picture.

It seems that if a buyer claims that the item was not received, it should be easy to disprove, right? Not really. The tracking number only suggests that the package was delivered to the address, not the buyer. What if it got stolen?

It’s even worse during the pandemic. Contactless delivery is on the rise. Delivery companies don’t event require a receiver to leave a signature anymore. However, it’s debatable that the signature drawn with a nail or a tiny stick on a miniature screen is a valid proof anyway.


Friendly fraud beyond chargebacks

Chargebacks are not the only tool that can be used to perform friendly fraud.  Big marketplaces, such as eBay, in a lot of ways act like banks. They do have better controls and notify the seller right away that the buyer is unhappy. Marketplaces usually give some time to the buyer and seller to resolve the dispute themselves. Despite this, merchants are usually the ones who lose. As with chargebacks, there’s no evidence they can provide that would prove that the item matches the description. Usually those cases end with the seller issuing either a partial or a full refund to the buyer while leaving the item with the buyer, as it’s economically unreasonable to pay for the return shipment of the item.


Verification as a long-term solution

Recently an article titled “Contactless Deliveries With Doorstep Verification” was published on Forbes. In this article, Alastair Johnson expresses his opinion about the friendly fraud issue. He says: “Verification lies at the heart of both the issue and the solution.”

He explains that thanks to the blockchain’s immutable ledger property, which can be combined with a verification software, we can verify every step of the product’s lifecycle. Imagine this sequence of verifications, which cannot be manipulated thanks to the blockchain:

  1. Manufacturer verifies the product after its production
  2. Warehouse verifies the product upon receiving it
  3. The Buyer verifies their identity and address during the purchase
  4. The courier verifies the delivery
  5. The buyer verifies the acceptance

Alastair Johnson suggests that it can go even further:

  • The verified buyer can leave a review.

This review is more reliable because there’s a proof that the buyer actually owns the item.

  • The buyer can gift the item to someone.

In this case the rights for the item now belong to a different person who can return or repair the item.

  • The parcel can be delivered to a person.

Instead of delivering a package to an address, it can be delivered straight to the verified person avoiding the risk of failed deliveries.

This is not a simple solution but rather a whole infrastructure that involves card associations, retailers, shipping companies, and, of course, users themselves. However, this solution would eliminate possible fraud related to eCommerce and regular retail. With such system in place, friendly fraud, whether intentional or accidental, would decrease significantly.


A simpler solution

The blockchain-backed verification of every step is a life-changing solution, however, how long will it take to create? It’s not the technology that is a problem. In order for it to function, all of the parties have to agree with each other and implement verifications into their daily procedures. This requires onboarding hundreds of millions of users and changing customer behavior.

For immediate fraud protection merchants can use existing BASIS ID solutions, which can provide address verification, doorstep verification, and identity verification of your customers. This will protect you not only from friendly fraud but also mitigate risks of other financial crimes.

If you have faced any of the challenges in this article or you need help with compliance and verification, please contact us and our specialists will help you find the right solution without any charge. 

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